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On May 9, we maintained a Neutral recommendation on Lennar Corporation on the back of solid first-quarter 2013 results and improving housing fundamentals. However, the overall weak economy and tight mortgage lending standards keep us on the sidelines.

Why the Neutral Recommendation?

On Mar 20, 2013, Lennar Corporation reported adjusted earnings (excluding deferred tax valuation allowance) of 14 cents per share which increased 75% from the prior-year quarter earnings of 8 cents. The earnings growth was driven by a double-digit growth in homebuilding revenues and solid operating margins. Including the income tax benefits, earnings were 26 cents per share which beat the Zacks Consensus Estimate of 13 cents by 100%.

Total revenue in the quarter grew 36.6% year over year to $990 million, driven by both pricing and volume growth in a stabilizing housing market. Revenues also beat the Zacks Consensus Estimate of $934 million by 6.0%.

Lennar has been witnessing solid year-over-year growth in new home orders, average selling prices and home closings for the past few quarters. Margins have also been above average, despite rising costs, driven by strong operating leverage. Lennar appears confident of a significant growth in fiscal 2013 as well.

Estimates mostly moved upwards after announcement of the solid first-quarter results and the upbeat outlook for 2013. The Zacks Consensus Estimate for 2013 increased almost 10% and that for 2014 went up 11% over the past 60 days.

Lennar has delivered positive earnings surprises in all the past four quarters with an impressive average earnings surprise of 46.4% in the trailing four quarters. We believe that the company is performing better than its peers by increasing sales prices, reducing incentives, improving volumes and by making opportunistic land acquisitions. In addition to its homebuilding operations, growth will also come from its multiple platforms including Rialto, Mutlifamily and Financial Services.

Notwithstanding the improving trend, new home demand in the U.S. remains at historically low levels due to the currently weak economic conditions and tight mortgage lending standards. Consumers will remain cautious until the employment scenario improves, home prices appreciate further and access to the credit markets eases. Sustainable increases in housing and housing demand for the long term will require the overall economy to strengthen, including further job growth which we believe will take time.

Rising input costs is also a concern due to increasing costs of raw material and labor.  As housing starts accelerate, both labor and construction material costs continue to experience upward pricing pressure, which could prove to be a major deterrent for margins in future quarters.

Other Stocks to Consider

Lennar carries a Zacks Rank #3 (Hold). Other stocks in the homebuilding sector that are performing well and deserve a mention include D. R. Horton Inc. , Ryland Group Inc. and Meritage Homes Corporation , all carrying a Zacks Rank #1 (Strong Buy).

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